WHITE PAPER. The Workforce. From Discovery to Production, Increasing Operational Efficiencies in the Pharmaceutical Industry

Transcription

1 WHITE PAPER The Workforce From Discovery to Production, Increasing Operational Efficiencies in the Pharmaceutical Industry

2 Response to a Maturing Market The global pharmaceutical industry has been one of the most successful in recent history in terms of innovation and growth, with IMS research estimating the total size at $825 billion in And as it matures, the industry is responding to the changes that naturally occur within any market: new technologies disrupting traditional business models, growth of generic competition and a search for high-growth markets. Kronos has also grown with Pharma and all of Life Sciences, claiming 26 of the top 30 companies as customers and 200 Life Science customers overall. With this experience, we can share how our customers are managing the impact of these changes on the workforce. Consolidation Through Acquisition a Large Global Workforce Global pharmaceutical companies have consolidated significantly over the past several years through acquisition. Companies such as Merck grew from 59,000 employees to 100,000 through acquisitions, and the pace continues. The growth benefits that drive these acquisitions are easy to understand: Acquisitions grow late-stage pipelines or access to new markets based on a company s current position in the market. But the way to offset the premiums paid is typically less well-defined, as they have not yet been identified. For example, Merck has publicly stated that its goal is to reduce costs by $3.5 billion in But until the companies understand how each other works, the ability to eliminate redundancy in operations and create harmony in their business processes is still being developed and valued. One area of rapid return comes from consolidating workforce management systems. Streamlining pay and work policies, along with back-office processes, is difficult when each change or opportunity for efficiency must be implemented through the multiple brands, versions and instances of technology often found in companies that have grown through acquisition. While it is tempting to extend existing ERP systems to time collection, the complexity and cost of enhancing these ERP solutions to support a diverse workforce and multiple accrual, payroll and attendance policies will negate many of the benefits and are reasons why efficiencies from merged workforces prove difficult to find. While considerable effort goes into achieving these cost savings, in reality, costs are only being shifted among cost centers. Research and Development Manufacturing Distribution Discovery Pre-Clinical Clinical Commercial Manufacturing Distribution Channels Pre-Discovery Scientists Engineers Technicians Project Managers Doctors Formulation Technician Fill Operator Production Technician Installation Maintenance Repair Shipping / Receiving Management and Administration Executives Brand Managers Industrial Production Accounting Auditors

3 Kronos customers find their hard-dollar savings in two ways. The first is reduced administration through the automation and simplification of back-office processes. For example, the payroll department can reduce its efforts by supporting multiple holiday calendars, managing complex accrual policies, regularly updating multiple collective bargain agreements, and providing research and responding to inquiries from the now large and diverse employee population. The second and even larger area is often a welcome surprise. With improved information available and better controls in place, companies can identify and eliminate significant amounts of time abuse, such as unnecessary overtime and unreported vacation. Industry studies by Nucleus Research have found that a consolidated workforce management system can save 3 percent of payroll. Efficiencies in R&D In addition to reducing costs, larger companies must execute successfully on their pipelines to reap the benefits of these acquisitions. With $137 billion in products facing generic competition industrywide over the next five years, and the products currently in the pipeline not expected to replace that revenue, according to IMS Research, pharmaceutical companies must improve the effectiveness of their R&D efforts to maintain the profitability by which investors value their companies. But several obstacles hinder efforts to reach higher levels of effectiveness. As the number of R&D projects grows and companies begin investing in me too drugs in addition to discovering new molecular entities (NME), the complexity of managing these projects will only grow. Add to that a project management infrastructure that is fragmented due to the different project management technologies inherited through acquisition, and the ability to provide timely and consolidated information becomes a challenge unto itself. Having timely, consolidated knowledge can have a significant impact on costs. In The Value of Improving the Productivity of the Drug Development Process, Joseph DiMasi found that savings through shortened clinical phases, appropriate termination of destined to fail projects and more productive discovery can reduce capitalized costs by 16 percent, 5 percent, and 20 percent, respectively. While these results make sense intuitively, and DeMasi s paper puts numbers behind the conclusions, translating those insights into daily decisions in the laboratory remains challenging. In a process dominated by people, trying to manage through a project tracking system only provides half the answer. Kronos customers that offer contract research services have figured out the other half. These companies have extended the data they collect in their timekeeping systems for paying employees to track time against projects. Companies such as Cangene, who have experienced yearly net income growth of 102 percent recently, have used Kronos workforce management to track the labor against all the projects they manage. Driven originally by cost-plus agreements with the Centers for Disease Control and Prevention, Cangene has taken its timetracking technology to a new level. They have identified four additional methods to extract value from the data they collect to generate payroll. IRS and Customer Compliance With research tax credits now an IRS Tier 1 category, the increased audits are handled more efficiently with easy-to-access and complete labor audit trails. For contract research and manufacturing companies, this information allows execution on cost-plus contracts. Daily Allocation of Resources At a managerial level, the software provides a workforcewide view of who is doing what at any time. Cangene uses this information to regularly align people with work and ensure that the highest priority projects are always staffed with the right number of people, thus increasing utilization and shortening development cycles. Project Costing Contract researchers understandably have a keen interest in the actual costs of a project, and Cangene has taken project costing a step further than most. For example, Cangene also tracks the indirect hours associated with a

4 project, such as how many hours HR employees spend working with people involved on a specific project. This helps ensure complete and accurate labor costing of the project. Executive Decision Making At an executive level, the software provides a consolidated view of all projects and their statuses down to the task level. With this information, insights are also available about how many labor hours have been invested by what types of employees in terms of job titles, skills and location to name a few of the attributes. This information is available from the workforce management system and provides decision support, enabling executives to understand estimated ROI based on current actual costs, as well as where shortages and excesses of talent exist within a newly expanded company. Office PivotView $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Office PivotTable CLIENT A single consolidated view of all the current clients and projects PROJECT A12 PROJECT M32 PROJECT Z55 PROJECT X22 PROJECT DESCRIPTION TASK DESCRIPTION HOURS DOLLARS PROJECT A12 4,471.5 $96, PROJECT M32 3,589.5 $81, PROJECT Z55 3,135 $64, PROJECT X $13, GRAND TOTAL 11,916 $254, Because employees understand the value of the data and how it impacts the business and their pay, compliance with data collection is not an issue. Research Tax Credits Since project based accounting captures research costs at the business component level, it generally establishes the required nexus, whereas cost center accounting does not always provide the nexus between qualified activities and their related costs. IRS, Research Credit Claims Audit Techniques Guide Operational Excellence in Manufacturing Branded pharmaceutical companies, much like software companies, have traditionally generated their competitive advantage in R&D and marketing of their products. Reducing the manufactured cost of their product by 10 or 15 percent would not have a material impact on profitability. But the market environment is changing. In 2009, 75 percent of drugs sold were generics. These products don t have the protection or the sunk cost of R&D and must compete on price, forcing lower cost production techniques. Combined with a slowing pipeline of blockbusters, this has meant a squeeze on revenues and profits for branded pharmaceutical companies. As a result these companies are entering the generic market to maintain revenue growth, but at substantially reduced profits. Additionally, because of the reduced barriers to entry, there are more generic manufacturers supplying a broader variety of drugs globally, additionally putting pressure on profits. Moreover, as they have done in so many other categories, Wal-Mart is taking advantage of the growth of generics and applying price pressure. With 350 generic drugs available at $4 for a 30-day supply, the profit squeeze is coming for a broader array of products. Based on current predictions from IMS Health, the introduction of new branded products will not offset the generic price squeeze.

5 This pressure adds a new dimension to manufacturing. Since regulatory and on-time fulfillment requirements are still critical components of success, how can companies find significant efficiencies from current manufacturing methods in a regulated environment when the process is characterized by significant restraints, such as the multiple-isolate and test events to maintain safety and quality of drugs? The scenario of commoditization forcing increased efficiencies is not unique to pharma and has been managed successfully by many industries. In fact, the good news is that the market for prescription drugs is growing, providing a manufacturing option that calls for increased volumes of production, which is a much better scenario than commoditization in a shrinking market. The first step is to understand the true manufacturing costs. One large Kronos pharma customer has already taken this initiative, responding to an executive request to understand the cost of a pill. Even for the same product, formulation and packaging differences for different countries can have an impact. It is only once the true cost is understood that strategic decisions can be made about what markets and contracts to enter and exit and where efforts for improvement will make a material difference to profits. In determining the cost of a pill, actual labor costs can be difficult to determine. For example, one pharmaceutical manufacturer was running a sustained overtime rate of 30 percent at the plants and 18 percent companywide. This was not reflected in their labor standards, and the labor cost variance was spread across all products, distorting their product line profitability picture. Using overtime generously used to be an acceptable method to ensure availability of product, but for a manufacturer competing in a generic market, overtime can t be the universal Band-Aid to solve production and scheduling issues. After costing prioritizes what needs to be improved, next comes the ability to improve the product mix and increase the volume of production without investment in new capital equipment. For the workforce, this means identifying nonproductive time for both equipment and labor. This downtime often results from extended line changeovers; waiting for maintenance; or delay due to labor shortages, such as an overburdened or unexpectedly absent technician. In effect, any of these delays has the same effect as the entire line shutting down. Improved labor scheduling of direct and indirect employees, better management of absence, and understanding the availability of substitute technicians are keys to maximizing volume on a production line. Conclusions Pharmaceutical companies are taking a diverse set of strategic and operational actions to increase revenues and maintain profits. But one common thread to all these efforts is a motivated and productive workforce. Research and Development Manufacturing Distribution Pre-Discovery Commercial Discovery Pre-Clinical Clinical Manufacturing Instant insight to staffing expenditures Measure labor output to Track labor hours for IRS tax incentives standards Enforce Performance measurement attendance policies Scale-up Predict time to completion Allocate labor to demand Know when to reallocate resources Labor costing Develop labor standards Skills planning Distribution Channels Quickly see the status of each order Make staffing adjustments to meet delivery deadlines FMLA and accruals management Wage and hour compliance Indirect labor cost allocation

6 At a time when profits are under pressure and capital investment is reserved for acquisitions, the existing workforce is one resource that can yield significant levels of return with limited investment. Kronos has delivered on this promise for over 200 companies in the Life Sciences industry over the last 30 years. As a global company with more than 5,000 manufacturing customers in over 60 countries, Kronos has a wealth of experience and proven results and can share with you how these customers achieved their success. References Pharmaceutical Costs, Technology Innovation, Opportunities & Reality, Girish Malhotra, PharmaPro. IMS Health Reports U.S. Prescription Sales Grew 5.1 Percent in 2009, to $300.3 Billion, IMS Health. The Value of Improving the Productivity of the Drug Development Process, Joseph A. DiMasi, Tufts University. R&D Tax Incentive Opportunities for Life Sciences Companies A Point of View, Deliotte LLP. Understanding Pharma: The Professional s Guide to How Pharmaceutical and Biotech Companies Really Work, John J. Campbell, Pharmaceutical Institute Kronos Incorporated 297 Billerica Road Chelmsford, MA (800) (978) More information about Kronos customer success stories may be found at , Kronos Incorporated. Kronos and the Kronos logo are registered trademarks of Kronos Incorporated or a related company. All other product and company names are used for identification purposes only and may be the trademarks of their respective owners. All specifications are subject to change. All rights reserved